Fed keeps rates steady; did Taylor and Barbie really drive Q3 economic growth?

November 13, 2023

The Takeaway is a CoBank publication that provides practical commentary on interest rates, derivatives and capital markets activities. These insights come from the professionals in CoBank’s Treasury, Customer Derivatives and Capital Markets groups, and other leaders across the bank—people who are in the market interacting with customers, investors and other lenders seeking to understand what is driving activity.

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Interest Rates: Fed leaves rate unchanged in November; tighter financial conditions make December increase unlikely

The Fed opted not to increase the benchmark fed funds rate at its November meeting amidst tightening economic conditions. A below-forecast October jobs report makes a December increase even more unlikely, according to Kiran Kini, CoBank's senior vice president and treasurer.

“The markets are pricing in less than a 5 percent chance of a rate hike by year end, which makes sense given what we are hearing from the Fed as well as the weakening data trend,” Kini said. “Given the significant move we’ve seen in long-term interest rates, the communication from the Fed over recent weeks has been consistent. Tightening of financial conditions resulting from higher interest rates is more than making up for any need to hike.

“There are estimates from market participants and from the Fed that say the tightening in financial conditions has been the equivalent of two to three rate hikes,” he added.

Despite the expectations, Kini acknowledged continued sticky inflation and an extremely robust third quarter driven by strong consumer spending.

“It depends on which metrics you look at, but inflation continues to be sticky,” said Kini. “Headline inflation has come down, as has core inflation. But super core inflation that the Federal Reserve watches continues to remain sticky.

“We had an incredibly strong Q3, with growth coming in at around 5 percent,” he continued. “There were one-off factors which drove that, including events like the Barbie movie, the Oppenheimer movie and the Taylor Swift tour. It seems weird to say it, but all of that happening in a short period led to a significant boost in consumer spending, which we’re seeing in GDP.”

Still, Kini pointed to signs that consumers are being stretched.

“Credit card balances are increasing, and car loan defaults and credit card delinquencies are picking up as well,” he said. “We’re seeing the consumer starting to show cracks, and I think that gives the Fed reason to pause and to be concerned. If this trajectory plays out, it will likely dampen spending, which will bring inflation down.”

Lastly, Kini noted two other key economic statistics.

The U.S. economy added a below-forecast 150,000 jobs in October, and the unemployment rate rose to 3.9—from 3.8—percent. Also, the U.S. Treasury Department said it expected to borrow $776 billion in the fourth quarter, $76 billion less than its forecast in July, which brought some relief to the bond markets.

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Interest Rate Management: Yield curve inverts at higher levels; banks adopt required hedging policies

The general shape of the yield curve remains relatively unchanged, but it continues to invert at an increasingly higher level, says Eric Nickerson, CoBank’s head of Customer Derivatives.

“The resilience and tenacity of this Fed tightening cycle has certainly surprised customers, and now they’re just exhausted,” Nickerson said.

“But the rate environment over the last 18 months has surprised lenders too,” he added. “One result of the unprecedented tightening cycle and the remaining uncertainty is that more hedging requirements are being implemented by lenders. If rates were to continue to increase, some companies’ debt levels and/or projects wouldn’t be sustainable.”

Nickerson explained that required hedging occurs when a lender requires a borrower to hedge all or some portion of an interest rate as a condition of the loan agreement. Required hedging protects the borrower, but also protects the lender by ensuring that the borrower can meet its debt service requirements.

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Capital Markets: Syndicated loan market update; economic factors explain commercial bank lending snag

While borrowers began 2023 with a sense of optimism, it didn’t take longer than the first quarter to see that the commercial bank lending slowdown, which began in mid-2022, would continue and slide even further downhill.

Bill Fox, CoBank's managing director, Capital Markets, says several economic factors, supported by data from the Federal Reserve, point to the lending drop.

“There has been more than a $900 billion drop in commercial bank deposits, which has limited commercial banks’ capacity to take on new debt,” said Fox.

“Many commercial banks are stressed, which has resulted in decreased lending activities and a greater focus on pricing and returns, with more demands for ancillary business.

“While some of the larger banks reported decent Q3 earnings, their forward outlooks are negative, and smaller banks are under duress right now, which means they’re not willing to lend as much or as easily as they have in recent years,” he added.

Fox also identified loan officer sentiment as a factor, citing Fed data that indicates both a tighter lending environment and higher loan costs.

“The Senior Loan Officer Opinion Survey from the St. Louis Fed indicates that 51 percent of banks are tightening their lending criteria,” Fox said. “At the same time, a vast majority of banks—68 percent—are increasing spreads.

“As a result, with credit quality across their portfolios declining, a bank that two or three years ago may have hypothetically lent $75 million to a borrower, now might decline to lend, or commit a much smaller amount and only with wider pricing and promises of ancillary business.”

Fox said credit capacity is becoming more important to borrowers than price, especially heading into year-end, when many banks traditionally curtail lending. CoBank, which has more than adequate capital and is not dependent on deposits to support its lending activities, can help fill in the gaps with customers by providing market-priced loans when others do not.

Market Focus


Market factors point to the biofuel industry for impending soy crush margin squeeze

The spate of biofuel plants coming online in the next one to three years is expected to compress soy crush margins, especially in the soy meal sector, according to Michael Tousignant, CoBank's sector vice president and managing director, Agribusiness. 

Soybeans are crushed to produce meal, which is used in human food as well as livestock feed products, and oil, which is used in biofuel plants.

“Margins for soy meal and soy oil should continue to remain strong for the next six months,” said Tousignant. “But after that, with the significant crush capacity coming on to feed this biodiesel beast, we anticipate that margins will fall significantly, particularly for meal.

“There is the potential for a real shakeout,” he continued. “And there’s a good chance that not all of the plants that have been announced, or on which construction has started, are going to get up and running.”

Tousignant noted the dramatic shift in soybean market dynamics over recent years. Crush operations had typically generated more income from soy meal. But the rapid growth of the biofuel industry has created stronger demand for soy oil.

Recent CoBank Capital Markets Activity

Sonoco Products Company

Sonoco Products Company

$900M Credit Facility
Administrative Agent, Joint Lead Arranger & Joint Bookrunner

Louis Dreyfus Company NA Finance One, LLC

Louis Dreyfus Company NA Finance One, LLC

$1.15B Credit Facilities
Administrative Agent & Joint Lead Arranger

W.K. Kellogg Co

W.K. Kellogg Co

$1.1B Credit Facilities
Joint Lead Arranger


Communications providers tap into alternative financing sources

Some communications companies have responded to the tight bank lending market by seeking capital using non-bank funding mechanisms and sources.

According to Andy Smith, CoBank's managing director, Communications, providers have begun securitizing and borrowing against their assets in the bond market, where players such as private equity funds and insurance companies invest.

“Think of it as pledging your network or your customer receivables as collateral and using that as a guarantee against borrowing money,” said Smith. “It’s a different way of generating capital, and it comes from an entirely different investor base.

“These companies can access more capital under these structures than banks would traditionally be comfortable lending, looking at it on a cashflow multiple basis,” he continued.

The race to be first into markets also is driving this trend.

“Companies are continuing to chase the first-mover advantage,” Smith said. “They’re trying to figure out different ways to access capital so they can plant their fiber flag first in these underserved and unserved markets.”

Smith noted that the securitization approach typically results in higher capital costs. Also, the market conditions that led to the commercial bank lending squeeze have had less of an effect on CoBank, which continues to have ample access to lending capital.

Recent CoBank Capital Markets Activity

Cogeco Communications Finance (USA), LP

Cogeco Communications Finance (USA), LP

$475M Credit Facility
Lead Arranger

ITC Fiber Holdings, LLC

ITC Fiber Holdings, LLC

$70M Credit Facility
Administrative Agent & Lead Arranger

Iron Mountain Data Centers Virginia 3, LLC

Iron Mountain Data Centers Virginia 3, LLC

$275M Credit Facility
Joint Lead Arranger

Power & Energy

SLLs fall prey to lending slowdown

The dramatic pullback in commercial bank lending has had an outsized effect on Sustainability-Linked Loans, according to Steven Wittbecker, CoBank's chief sustainability officer.

The U.S. market for SLLs, which are loans that allow borrowers to align their sustainability ambitions with their financing, was solidly established in 2021 and 2022. However, SLL volume has declined dramatically in 2023, especially in the third quarter.

“In addition to credit factors that can increase or decrease loan pricing, SLLs layer in a sustainability metric that can also affect pricing based on achievement of certain Environmental, Social and Governance performance indicators agreed upon between the borrower and the lender(s),” Wittbecker said.

To date, CoBank has participated in SLLs for customers originated by other lenders. Wittbecker said CoBank is using the lull in SLL activity to advance its internal processes to position the firm to lead appropriately structured SLLs for borrowers in the future.

“As the SLL market has contracted this year—which we fully believe is a transitory event—we’ve used the time to prepare ourselves operationally for SLL origination, and we’re at that point now,” Wittbecker added. “We’re in the midst of several SLL conversations, and although we haven’t made an origination commitment yet, we have been writing optionality to add SLL attributes to loans for a later point in time.”

Wittbecker noted that much of CoBank’s current SLL activity involves power & energy providers, but there also is growing activity and interest among agribusiness and communications industry borrowers.

Recent CoBank Capital Markets Activity

Tri-County Electric Cooperative, Inc.

Tri-County Electric Cooperative, Inc.

$100M Credit Facility
Administrative Agent

Arizona Electric Power Cooperative, Inc.

Arizona Electric Power Cooperative, Inc.

$81M Credit Facility
Administrative Agent

CORE Electric Cooperative

CORE Electric Cooperative

$150M Credit Facility
Administrative Agent

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